Open Software Foundation v. U.S. Fidelity

• Citation: 307 F.3d 11
• Decision Date: 04 October 2002
• Docket Number: No. 01-2342.,01-2342.
• Parties: OPEN SOFTWARE FOUNDATION, INC., and Hewlett Packard Company Plaintiffs, Appellants, v. UNITED STATES FIDELITY AND GUARANTY CO., Defendant, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

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307 F.3d 11

OPEN SOFTWARE FOUNDATION, INC., and Hewlett Packard Company Plaintiffs, Appellants, v. UNITED STATES FIDELITY AND GUARANTY CO., Defendant, Appellee.

No. 01-2342.

United States Court of Appeals, First Circuit.

Heard June 10, 2002.

Decided October 4, 2002.

Rehearing and Suggestion for Rehearing En Banc Denied November 13, 2002.

Eric R. Little, with whom David A. Gauntlett, Gauntlett & Associates, Stephen G. Hennessy, and Corcoran, Fitzgerald & Hennessy, LLC were on brief, for appellants.

David M. Ostrander, with whom James S. Greenan, Greenan, Peffer, Sallander & Lally, LLP, John Graceffa, and Morrison, Mahoney & Miller were on brief, for appellee.

Before TORRUELLA and LIPEZ, Circuit Judges, and SCHWARZER, Senior District Judge.^*

LIPEZ, Circuit Judge.

Plaintiffs Open Software Foundation (OSF) and Hewlett-Packard (HP) brought this diversity action against USF&G, their general commercial liability insurer, claiming that USF&G had a duty to defend a lawsuit filed against them by Addamax Corporation, a software manufacturer.¹ After OSF decided not to bundle Addamax security software into its UNIX-based operating system, Addamax sued OSF in 1989, alleging that it was a price-fixing purchasing pool. The litigation continued until 1998, when we affirmed Judge Tauro's grant of summary judgment to OSF. See Addamax v. Open Software Found, 152 F.3d 48 (1st Cir.1998). OSF's general commercial liability policy with USF&G obliged the insurance company to indemnify OSF for liability incurred in suits based on a range of activities classified, inter alia, as "personal injury" or "advertising injury."

We agree with the district court that Addamax's complaints, read in conjunction with all relevant extrinsic evidence cited by OSF, neither stated nor adumbrated a claim for damages resulting from a "personal injury" or "advertising injury" defined in the policies. Consequently, we conclude that USF&G had no duty to defend the Addamax litigation, and we affirm the decision of the district court granting summary judgment to USF&G.

I. Background

Organized in 1988 by seven computer hardware and software companies (the "sponsors"), pursuant to the National Cooperative Research Act of 1984, 15 U.S.C. §§ 4301-05 (1993), OSF was tasked with designing and marketing a UNIX-based operating system known as OSF/1 that would become an industry standard for UNIX users. To induce other companies to develop components for its operating system, OSF formulated various "requests for technology" (RFTs), which essentially offered competing suppliers the opportunity to submit their products to be integrated into the OSF/1 operating system.

One necessary component of the operating system was security software. In November, 1989, OSF solicited two software developers, Addamax Corporation (Addamax) and Secureware, to submit their security technologies for evaluation. Roughly one year later, OSF selected Secureware's security technology to be incorporated into OSF/1.

In April, 1990, Addamax's counsel sent a demand letter to OSF claiming that its decision to "bundle" Secureware software into OSF/1 violated federal and state antitrust laws, and threatening litigation if the alleged violations were not remedied. When OSF failed to respond to these demands, Addamax filed a complaint against OSF and two of its sponsors, Hewlett-Packard and Digital Electric Corporation. Addamax alleged that the sponsors and members of OSF were a "buyers' cartel" that conspired to coerce software makers into offering their products to OSF at prices below fair market value.² The complaint summarized Addamax's claims as follows:

This is an action to recover damages and obtain permanent injunctive relief against the Open Software Foundation, Inc. ("OSF"), Digital Equipment Corporation ("DEC"), and Hewlett-Packard Company ("H-P") for violations of federal and state antitrust laws, unfair trade practice law, and the common law of the Commonwealth of Massachusetts.... OSF acts as an illegal cartel through which its Sponsors ... have illegally combined, contracted, or conspired to exercise their aggregate market power by, among other things, fixing prices for the software technology OSF acquires from software developers; setting a price ceiling in certain software markets; allocating product markets among the Sponsors; and boycotting certain independent software developers, including [Addamax]. The net effect, among others, of the defendants' activities has been and will be to unlawfully and unreasonably restrain trade, substantially lessen competition among purchasers of software, drive independent software developers out of business, and reinforce the strong market positions of OSF and its Sponsors.

Of the nine counts in the complaint, the first seven were based on federal or state antitrust statutes. The eighth count alleged that OSF's operations constituted "unfair methods of competition and unfair or deceptive acts or practices" in violation of Mass. Gen. Laws ch. 93A, §§ 2 and 11 ("Chapter 93A"). The ninth count alleged that OSF and its sponsors "intentionally and improperly interfered with Addamax's actual contractual relations and prospective contractual relations." Approximately two years after filing its original complaint, Addamax filed an amended complaint to include, inter alia, more detailed allegations describing and illustrating OSF's practice of coercing independent software vendors to license their products at below-market prices.³

OSF and HP successfully defended the Addamax suit. We "found that antitrust violations, even if they were assumed to have occurred, were not a material cause of Addamax's failure in the line of business at issue," and accordingly affirmed the district court's grant of summary judgment to OSF. Addamax Corp. v. Open Software Found., 152 F.3d 48, 50 (1st Cir.1998).

Anticipating the costs of defending the Addamax suit, OSF's corporate counsel sent a letter to USF&G on March 5, 1992, requesting that they defend the claim pursuant to the primary and excess liability policies issued by USF&G. In a memorandum appended to the letter, OSF's associate general counsel, Sue Schlener, argued that the Addamax claims were covered by OSF's policy with USF&G under the "advertising injury" or "personal injury" clauses of the policies. After consulting outside counsel, USF&G notified OSF on August 25, 1992, that it did not consider any of the claims to fall within the coverage furnished by the primary and excess liability policies, and therefore declined to accept tender of the defense.

Approximately six years later, OSF filed this lawsuit against USF&G while Addamax's appeal in the underlying action was still pending before this court. Claiming that USF&G had a duty to defend the Addamax claim, OSF requested a declaratory judgment to this effect as well as damages in the amount of reasonable defense costs. OSF specifically contended that Addamax's suit alluded to "personal injuries," including defamation, and "advertising injuries," including unfair competition; and asserted that since both types of claims were listed in USF&G's general and excess liability policies, USF&G had a duty to defend. In a thoughtful opinion, the district court found both arguments unpersuasive and granted USF&G's motion for summary judgment. OSF appeals, arguing that both the personal injury and advertising injury clauses of the GCL triggered a duty to defend.

II. Interpreting the Policies

Like most other jurisdictions, Massachusetts imposes a broad duty to defend on insurers: "[i]t is axiomatic that an insurance company's duty to defend is broader than its duty to indemnify." Boston Symphony Orchestra v. Commercial Union Ins. Co., 406 Mass. 7, 545 N.E.2d 1156, 1158 (1989). The Supreme Judicial Court (SJC) has observed that the duty to defend "is based on the facts alleged in the complaint and those facts which are known by the insurer." Boston Symphony, 545 N.E.2d at 1158. Thus, the insurer must accept tender of a defense if the complaints state or adumbrate⁴ a covered claim when read in light of extrinsic facts⁵ bearing some relevance to the allegations that the plaintiff did not specifically include in the complaint, but were nonetheless known or readily knowable by the insurer when the defense was tendered:

[T]he question of the initial duty of a liability insurer to defend third-party actions against the insured is decided by matching the third-party complaint with the policy provisions: if the allegations of the complaint are "reasonably susceptible" of an interpretation that they state or adumbrate a claim covered by the policy terms, the insurer must undertake the defense.... Otherwise stated, the process is one of envisaging what kinds of losses may be proved as lying within the range of allegations of the complaint, and then seeing whether any such loss fits the expectation of protective insurance reasonably generated by the terms of the policy.

Continental Cas. Co. v. Gilbane Bldg. Co., 391 Mass. 143, 461 N.E.2d 209, 212 (1984) (quoting Sterilite Corp. v. Continental Cas. Co., 17 Mass.App.Ct. 316, 458 N.E.2d 338, 340-41 (1984) (citations and footnote omitted)).

Determining whether complaints "adumbrate" a claim can be a difficult interpretive exercise. OSF and USF&G advance widely varying accounts of how the court, applying Massachusetts law, is to analyze the complaints and facts extrinsic to them when "envisaging what kinds of losses may be proved as lying within the range of allegations of the complaint." Continental Cas. Co., 461 N.E.2d at 212. USF&G argues that "even if facts exist extrinsic to the complaint which, if they were pleaded, would trigger coverage ... [t]here is no duty to defend" if the "allegations of the complaint are unambiguously outside the scope of policy coverage." OSF rejects this characterization of Massachusetts law and largely rests its case on the proposition that USF&G had a duty to defend OSF...